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The Prime Minister's defence of the pursuit of growth has stirred fresh debate on the right mix of economic gain and social welfare. In the first of a two-part series on economic growth, Political Correspondent Robin Chan delves into the issue.

SINGAPORE'S seeming ability to grow against the odds has been a hallmark of its economic development.

To spur growth, the Government has consciously driven change, in the 1960s through industrialisation, in 1985 - post recession - by making wages more flexible and cutting direct taxes, and then again in 2003, when it launched its third economic 'paradigm shift'.

From 1997 to 2003, the economy suffered a series of setbacks that included a debilitating Asian financial crisis, the post-Sept 11 gloom, a dot.com bust and the Sars public health crisis.

By 2003, the city state's economy was at a turning point, triggering a third paradigm shift centred on innovation and entrepreneurship as well as deregulation and liberalisation.

In a speech at the Economic Society in 2003, then Deputy Prime Minister Lee Hsien Loong asked for support for the latest round of restructuring, saying 'no system works forever'.

As National Development Minister Khaw Boon Wan explained recently, post-Sars, Singapore's economy was down in the doldrums. Unemployment hit 5.5 per cent in September 2003, which meant close to 100,000 people out of work, many of them for more than six months.

The Government looked hard for investments to create jobs, Mr Khaw said, but at first, these proved elusive. When the investments finally came, they came 'suddenly' and 'in a bunch'.

The Government made a call to 'take them', he said, even though it knew there would be both positive and negative consequences. New investments in pharmaceuticals, petrochemicals and casinos poured in. They were worth billions and created jobs. The economy added 124,500 jobs in the first nine months of 2006 - a major turnaround from just three years before.

But problems also surfaced - a growing income divide and the strain on infrastructure, from transport to housing.

That in turn has prompted some economists to ask if Singapore should still seek to grow as fast as it can when it can, or choose to grow slower because social equality is more important than economic gain.

The cost of growth

FIVE years ago, in 2007, private-sector economist Chua Hak Bin circulated a paper to economists to highlight a shocking new development - rising income inequality at a time of high economic growth.

The paper was initially met with scepticism from some. Dr Chua, now an economist at Bank of America Merrill Lynch, said there was discomfort over the questioning of Singapore's growth model, which had long been hailed 'as a success story'.

His paper contained data which showed wages for the lower-income groups falling, while those at the top soared.

Between 2004 and 2006, economic growth averaged 7.6 per cent a year, while the unemployment rate fell from 4.8 per cent to 2.7 per cent. Tax rates and employer Central Provident Fund contribution rates were also slashed to boost business growth.

But the bottom 30th percentile of income earners saw their incomes fall an average of 2.4 per cent a year from 2000 to 2005, as the top 30th percentile saw a 2.5 per cent average rise each year.

Dr Chua's paper quoted Prime Minister Lee as saying at the 2006 National Day Rally: 'When the conditions are good and the sun is shining, we should go for it, as fast as we can, as much as we can.' That signified a shift to an 'aggressive pro-growth attitude', Dr Chua said in his paper.

But that approach was creating a two-speed dual economy, Dr Chua pointed out - with a fast track for the rich and a slower one for the poor.

'Growth at the time was incredible, reaching 7 per cent to 8 per cent each year, but yet there was also a sense that it wasn't being well-shared, and that productivity growth was low, even negative,' he said.

'That is when it became stark.'

That paper was one of the earliest warnings of the dangers of Singapore's fast growth and liberal foreign worker policy.

Soon, more and more economists started talking about income inequality and over-reliance on foreign workers, even as Singapore's high-speed growth continued to win it praise worldwide.

It was one of 13 economic success stories studied by the Commission on Growth and Development led by Dr Michael Spence, a Nobel-prize winning economist, in 2008.

That same year, University of Michigan business school professor Linda Lim crudelysurmised that the Government must have 'growth fetishism'.

She said Singapore's growth model has 'tried to do too much, and achieved too little', citing its desire to bring in many investments across different sectors. She pointed out that median income had stagnated, as the wage share of gross domestic product was at a very low 41 per cent, with the bulk of GDP going to firms in the form of profits.

The next year, Ang Mo Kio GRC MP Inderjit Singh said the Government should not pursue 'growth at all cost', a line he has advanced time and again despite it earning him a rap from Finance Minister Tharman Shanmugaratnam in 2008.

Mr Singh was worried that bosses of small and medium-sized enterprises (SMEs) were being hurt by rapidly rising costs and ordinary Singaporeans were seeing their wages stagnate due in part to the availability of cheap foreign labour.

But Mr Tharman said unequivocally in the Budget debate that year that the solution to income inequality cannot be to slow growth down. 'Our growth strategy in the past decade, was not wrong-headed. It illustrates the very real trade-offs we face in practice when deciding whether to allow the economy to grow rapidly and above its potential for a period,' he said.

'To do so indefinitely will lead to overheating. But it would have been ill-judged to prevent businesses from expanding in the name of avoiding rapid growth, even after having suffered a period of very weak growth in early years.'

But as inequality rose, the notion of 'inclusive growth' increasingly came to the forefront of discussions on economic strategy. Then Acting Manpower Minister Gan Kim Yong headed a sub-committee to look at exactly how to achieve that, as part of the Economic Strategies Committee, and it became a key plank of the Budget.

The debate has continued till today. Earlier this year, six economist penned a 41-page paper calling for a new social compact 'that achieves a better balance between growth and equity'.

'Without growth, we have no chance of improving our collective well-being. Far more countries worry about growing too slowly, than growing too fast. For Singapore, slow growth will mean that new investments will be fewer, good jobs will be scarcer, and unemployment will be higher.'

Picking up this line of thinking, National University of Singapore economists Tan Kee Giap and Tan Kong Yam argued recently that strategies to sharpening Singapore's international competitiveness and plug into the globalisation process 'are the only ways to maintain Singapore's first world living standard'.

'Slower growth is certainly not the way to ease social strains,' they added.

Why slow growth?

THE Government equates slow growth to losing out on opportunities for investments and good jobs - a vicious cycle that could even lead to a 'loss of optimism', said the Prime Minister.

It requires growth in skills, and mechanisation, and will lead to rising real median wages. But such higher-quality growth tends to be at a lower speed than low-skilled, cheap labour driven growth. Even the most productive, developed countries tend to be limited to 2 per cent to 3 per cent of higher-quality growth, he noted.

To incentivise such growth, labour force growth must be low - 0.5 per cent to 1 per cent a year, he said.

'If labour force growth is higher, then productivity growth tends to be depressed so you might end up with faster growth of say 4 per cent to 6 per cent, but with 1 per cent productivity growth or less,' he argued.

The Government has already taken steps to slow the inflow of foreign workers through lower dependency ratios, higher foreign worker levies and changes to S-pass and employment pass rules.

Manufacturing firms will see their DRCs - the maximum share of foreign workers in a firm's workforce - fall from 65 per cent to 60 per cent. In services, the ratio is being cut from 50 per cent to 45 per cent next month.

The phasing in of higher foreign worker levies started last year and will mean employers having to pay from $150 to $330 more per worker by next year.

The Government has shifted its position, but while it tries to boost productivity and limit foreign worker inflow, it also needs to manage the fallout. Businessmen and SME bosses in particular are feeling the pain and there is a risk that if the change is too abrupt, many firms will shut and leave Singaporeans out of jobs.

Mr Yeoh is of the view that the labour force should 'grow at its natural demographic rate, supplementedjudiciously by skilled immigration plus a reasonable productivity growth'.

To others, slow growth means picking and choosing where and when to grow.

Mr Inderjit Singh suggests 'a balanced growth' strategy, which means looking more closely at the costs of growth and deciding when not to pursue growth opportunities. 'I think we are at a stage of development where we can be a little selective, although not everything may be in our control,' he said.

Former Singapore Exchange chief executive Hsieh Fu Hua suggests more help for domestic-oriented sectors such as restaurants and other non-exportable services, where wages tend to stagnate. 'We don't need to compromise on our growth engines. But we should make sure our other engines that were sputtering will get revived and get their own space,' he said.

So, for example, a hawker centre might not have the same economic value as a shopping mall, but it is an important part of the local economy and can be supported and promoted by easing its land and rental costs, he added.

Economic Society vice-president Donald Low said 'the mantra that we should grow first then worry about redistribution later, while appropriate for a previous era, is probably less so for today's context'.

Internationally, 'the prevailing economic wisdom' of the previous decade was that there is a global war for investments and talent, he said, and countries had to slash income taxes and trim social safety nets to make themselves attractive.

But now, there is a growing realisation that welfare spending, can ease the pain of economic restructuring and globalisation. Investing more in education and training to improve social mobility, for example, can help local workers adjust to more foreign competition and greater economic uncertainty, he said.

On Singapore's approach, he said: 'With the exception of Workfare... the paradigm is still very much that of a trade-off: that measures to increase social equity usually or even necessarily entail lower growth. This paradigm also explains the Government's general reluctance to take a more aggressively redistributive approach to public spending.'

Ultimately, growth is more about the choices made to get to it than the final number in and of itself, the economists said.

The Government has acknowledged the need to step up social spending significantly as the population ages and health-care costs rise.

Over the last five years, social spending rose from $13 billion in 2006 to $21.5 billion last year.

This will rise further, with plans to double spending in health care, and to increase the social safety net with a permanent GST Voucher scheme to help low-income households as well as to raise subsidies for medical care.

It has moved on this front despite its perennial worries about how financially viable a liberal system of social handouts might be, especially since these cannot be reversed easily.

The Prime Minister warned in his speech that more spending will require new revenues and higher taxes, a cost that many may not be prepared to pay. The hue and cry over the hike in GST from 5 per cent to 7 per cent in 2007 is a case in point.

Even so, economists point out that public spending is a conservative 17 per cent of GDP, much lower than many developed nations.

And there are those who argue that there are ways to increase public spending without raising taxes, such as tapping more of the net investment returns from the reserves. And a rise in taxes, say to 25 per cent or 30 per cent, justified by a need to help the less well off, might well be politically acceptable to the public, even if it does raise questions about economic competitiveness.

Citigroup economist Kit Wei Zheng said: 'The problems of the last five years brought out a deeper, broader issue related to the social compact and the political economy. These go beyond the realm of economics but penetrate to the fundamental, perhaps ideological, question of the kind of society that we want.'

Mr Manu Bhaskaran, economist at Centennial Asia Advisors, said: 'At the end of the day, what we want is a growth strategy that puts the average man at the centre, that generates visible benefits for the average Joe, not one that relies on some unpredictable trickle-down effects.'

Same destination

IT MAY seem at times that the Government and economists are headed down different paths, but their destination is the same.

The goal of both groups is growth that is sustainable, both economically and politically.

PM Lee himself made this clear when he addressed the Economic Society nine years ago. Economic restructuring can only work, he said, 'if Singaporeans feel that the system is fair to all, and benefits everybody over the long run'.

The present debate arises because they have differing views on how best to get there.